I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Sandy Weill Built Citi And Pandit Kept It Standing. Will Corbat Shrink It?

Citigroup‘s surprise announcement that Vikram Pandit is stepping down as chief executive, taking President John P. Havens with him, could signal the true end of empire-building in commercial banking. The incoming chief, Michael Corbat, came up through the bank after graduating from Harvard in 1983, holding a wide variety of unglamorous jobs including the task of selling off $500 billion in unwanted assets in Citi’s post-crisis “bad bank.” The board of directors may have put him in charge to accelerate the process of reducing Citi to manageable size.

Sanford Weill built Citi into a too-big-to-fail institution by steamrolling over the last remnants of the Glass-Steagall Act that previously had separated the deposits-and-loans business from riskier activities like investment banking and underwriting stocks. Charles Prince tested the premise by gorging on Citi’s own cooking in the form of toxic mortgage-backed securities that threatened to destroy the bank’s capital base.

“By allowing them to get so large, and so complex, we almost insured the banks would get too big too fail,” said Arthur Wilmarth, a law professor at George Washington University who specializes in banking regulation.

Vikram Pandit took over in 2007 after Citi bought his hedge-fund business, Old Lane Partners, which it quickly closed. It was Pandit’s job to keep Citi solvent, with generous amounts of federal guarantees, in hopes of an earnings rebound that would replenish the bank’s capital and maybe even allow it to grow again. A couple of years ago, Citi managers were talking about a new era of growth in Asia as the bank peddled loans, investments and even hedge funds to millions of newly rich Chinese. The financial supermarket would establish a new and better franchise overseas.

Corbat would not appear to be the man for making Citi bigger. As head of Citi Holdings, which the bank euphemistically called its “non-core” assets (read: we loved them until we didn’t), Corbat meticulously sold off half a trillion dollars’ worth of unwanted junk, from Diner’s Club to the Smith Barney brokerage business. He switched to running Citi’s Europe, Middle East and Africa operations at the beginning of this year. Revenue and earnings for consumer and merchant banking in the EMEA region were flat to down in the first half of this year, while Asia grew. So Corbat was not promoted because he has presided over rapidly growing businesses.

Instead, he is probably being promoted because he understands how to run practically every operation inside a modern bank, including the ones that the bank never should have bought in the first place. At Citi Holdings, Corbat had the thankless task of trying to stem the losses from billions of dollars in unsecured personal loans and other unwise investments while simultaneously trying to negotiate the best price possible for them in a sale. Timing was a key part of the job; if he’d blown them out at any price early in his tenure, Citi would have recovered far less of its losses.

Perhaps Corbat’s job will be to shrink or split up the main bank, where consolidated assets actually grew slightly in the first half to $1.9 trillion. None less than Sandy Weill called for just that in July.

“Have banks be deposit takers,” he told CNBC then. “Have banks make commercial loans and real estate loans. And have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”

Maybe Corbat’s just the right man for the job. The question is whether stricter regulation, or market forces, or a combination of the two, force the big banks to get smaller.

Wilmarth is in favor of eliminating the subsidies that help big banks survive. Chief among them is the Fed’s zero-interest-rate policy, which extracts dollars from the pockets of savers and retirees and hands them to banks in the form of a lower cost of funds. But there are many more, including the Fed’s continued willingness to allow banks to use their cheap deposits as a source of funding for riskier activities like underwriting securities and trading derivatives.

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